CheckPoint: A New House – Economy Consumers use marginal costs and benefits to determine if they should make or reject a certain decision. Marginal costs refer to the change in cost over the change in quantity while marginal benefits refer to the change in benefits over the change in quantity (“Marginal Costs & Benefits”, n. d. ). The strength of the economy as a whole could affect the marginal benefits and the marginal costs associated with a decision to purchase a home.
During times of economic growth, a consumer may feel that the purchase of a new house is a good decision because it allows him to enjoy a better living environment. During such periods, the consumer is not worried about mortgage or spending since he is optimistic about the economic situation. Therefore, he feels that the marginal benefits outweigh marginal costs. On the other hand, during times of recession, a consumer may feel that purchasing a new house is an unwise decision since he is worried about being retrenched and thus prefer to save up money.
In this case, he feels that the marginal costs outweigh the marginal benefits. The removal of the tax deduction on mortgage interest will reduce demand for houses since it reduces the benefits which consumers can enjoy with the purchase of a new house. Other economic policies can also consumers’ decisions. For example, when the government increases income tax, consumers will have less disposable income and are thus less willing and able to purchase homes.
This reduces demand for houses as well. Alternatively, when government increases government spending by building better infrastructures, it helps to attract investments and promote economic growth. As a result, consumers are more willing and able to purchase new houses and this can result in an increase in demand for houses. Reference: “Marginal Costs & Benefits”. (n. d. ). Retrieved July 17, 2010 from Environmental Literacy Council: http://www. enviroliteracy. org/article. php/1323. html